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Hurricane Harvey PCE miss

29 September 2017

One of the US Fed’s favoured measures of inflation is core personal consumption expenditure (PCE). The core version of consumer spending strips out energy and food components, which are volatile from month to month, in an attempt to identify the prevailing trend. It’s not the only measure of inflation used; the Fed also tracks the Consumer Price Index (CPI) and Producer Price Index (PPI) from the Department of Labor.

The latest core PCE figures have been published by the Bureau of Economic Analysis as part of August figures for personal income and expenditures. At 0.1% for the month, the numbers were below the market’s expectation of +0.2%. On an annual basis, core PCE increased by 1.3% which was lower than July’s comparable annual figure of 1.4% which in turn was lower than June’s 1.5%.

According to the U.S. Bureau of Economic Analysis, Hurricane Harvey had some effect on the figures, not just in terms of changing consumers’ purchase patterns but also in terms of the Bureau’s ability to collect data. The size of the effect was unknown at this stage.

According to ANZ Research the numbers were not quite as bleak as first thought. “The miss will keep Fed doves cautious about inflation dynamics. Despite the soft annual picture there has been an increasing trend since May, driven by a pick-up in goods prices and steady services price gains.”

U.S. bond yields finished the day higher but not because of the PCE figures. After the release of the expenditure figures, news of a new candidate for the Federal Reserve chair emerged and the person is thought to have quite hawkish tendencies, especially with regards to quantitative easing policies. US 2 year bond yields closed 3bps higher at 1.48%, while 10 year yields also rose 3bps to 2.33%.